Introduction: Real-world impact

This report reveals the findings from new primary research into transition finance.

It is based on a survey of 300 senior professionals at asset-owner institutions and advisors around the world, including pension funds, insurers, endowments, foundations, central banks, sovereign wealth funds, and consultants.

Will climate change cause irreparable harm? Or will we get to net zero in time, averting the worst effects?

There is much to do. CO₂ emissions are growing, and it is not clear how we will meet the proliferating climate targets or how a shift to a low-carbon world will affect many industries, systems, processes and workforces.

What we do know is that change will require enormous sums of capital, effectively directed. Making sure funds flow to all areas that need to transform or develop – in ways that are also profitable for businesses and investors – is going to be a key challenge in the fight against climate change.

Many ‘green’ strategies avoid the problem

The investment world has responded to this challenge in a number of ways. A predominant trend has been the rapid expansion of ESG-branded investment strategies, funds and services.

In 2022, global ESG assets are expected to rise to US$41 trillion, which is nearly twice the amount of 2016 (US$22.8 trillion). By 2025, ESG assets are forecast to pass US$50 trillion and to comprise one-third of total global assets under management.

Meanwhile, the exhausts and smokestacks of the world are setting their own records, releasing more CO₂ in 2021 than in any other year in history, with the increased burning of coal the main factor behind the rise.

Why does it seem that the enormous movement of capital to ESG-branded assets has done little to slow the advance of human-driven global warming?

ESG-branded assets are designed to show small carbon footprints, but this sometimes means they are not addressing real-world decarbonisation.

“It’s good that investors can track the carbon intensity of portfolios, but this is often just portfolio, or paper, decarbonisation,” says the head of sustainability at a European asset owner. “The fact is, you can easily change these numbers by simply shifting out of polluting sectors and companies, which does not help to reduce emissions in the real world.”

There are similarly evasive strategies in other industries. For example, oil and gas majors have divested high-polluting business units, or contracted polluting processes to third parties, removing the emissions – on paper at least – from their responsibility, without reducing the real-world impact of the industry.

Funding real-world impact

The term describes investments that enable an investee’s climate-change strategy and can involve:

1. Investing in some of the most challenging industries to decarbonise, such as steel, cement and chemicals, so that high emitters receive the capital and influence they need to transform their operations.
2. Investing in new innovations and projects that might not be profitable initially, such as green hydrogen and carbon capture and storage, but require stable funding to develop.
3. Funding vast infrastructure transformations, such as expanding and modernising electrical power grids and transmission systems.
4. Increasing exposure to emerging markets, where emissions continue to grow the fastest and the need for all forms of support is greatest.

How asset owners set their targets

Among the asset owners that have climate-related targets, 48% set them at overall portfolio level, while 46% set targets for specific mandates, portfolios or funds. Only 28% set their targets at asset-class level.

Q1: Which type of climate-related targets or limits does your fund have in place?

Q2: What is the level or scope of your climate-related targets?